Tuesday, December 06, 2011

Hoover Institute recommends Hooverite policies

Why has the recovery been so slow? What can we do about it? Alan Greenspan, George Shultz, Ed Prescott, Steve Davis, Nick Bloom, John Cochrane, Bob Hall, Lee Ohanian, John Cogan and I recently met at the Hoover Institution at Stanford to present papers and discuss the issue with other economists and policy makers including Myron Scholes, Michael Boskin, Ron McKinnon and many others...In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward, and (3) policy reforms that would normally be considered helpful in the long run would actually be very helpful right now in the short run.

Wow, shocking. The recession is Obama's fault for being a crypto-socialist, stimulus doesn't work, and the rich should get tax cuts. Who would have ever guessed that this team of mavericks would reach such a startling conclusion?

But I kid. Actually, the story of the Hoover conference is a little more interesting. It seems to have been pretty evenly split between people who simply re-asserted the standard conservative line, and people who supported either Keynesian solutions or an end to Republican obstructionism, but whose conclusions were spun in the writeup to fit the conference's (or Taylor's) preferred conservative policy line. So let's look at the specifics of what was said, as reported by Taylor.

First, George Schultz:

George Shultz led off by arguing that diagnosing the problem and thus finding a solution was extraordinarily important now, not only for the future of the United States but also for its leadership around world.

Mmm, you don't say...

Tax reform, entitlement reform, monetary reform, and K-12 education reform were at the top of [Schultz's] pro-growth policy list.

Because if we haven't diagnosed the disease, we might as well recommend that the patient drink lots of fluid and get plenty of exercise. That seems to be the idea here. Actually, I am pretty cool with that, since I like it when people admit how much we don't really know. It shouldn't be interpreted as blaming "uncertainty" or calling for austerity, though.

On to Alan Greenspan:

Alan Greenspan presented empirical evidence that policy uncertainty caused by government activism was a major problem holding back growth, and that the first priority should be to start reducing the deficit immediately; investment is being crowded out now.

Wow, empirical evidence that policy uncertainty is holding back growth? Show, us, please! Sadly, Greenspan's evidence appears to be proprietary, and only available to people who pay Greenspan Associates for the privilege of hearing that Obama's crypto-socialism is crippling the economy. Whereas the rest of us poor folks are forced to post all our evidenceto thecontrary online, for free.

Nick Bloom, by contrast, actually does have some evidence. With Scott Baker and Steven Davis, he constructs a measure of policy uncertainty that matches historical events like 9/11, and then shows that this measure has spiked recently as well. That is well done! Of course, it's not certain which way the causality runs; large economic crises necessitate large policy responses, and there will probably be uncertainty as to what those responses will be. But anyway, Bloom appears to have produced by far the best available study on the role of uncertainty, and he should be applauded for this. Note: John Taylor fails to mention that, according to Bloom's measurements, the main sources of uncertainty in the current recession have been A) Republican brinksmanship over the debt ceiling, B) Europe, and C) efforts to sue Obama's health care bill out of existence...

Anyway, onward! Next up we have Ed Prescott:

Ed Prescott had the most dramatic policy proposal which he argued would cause a major boom and restore strong growth. He would simultaneously reform the tax code and entitlement programs by slashing marginal tax rates which would increase employment and productivity.

This line actually made me laugh out loud. A "dramatic policy proposal"...cut tax rates for the rich! Ed Prescott, you maverick, you.

But now I come to a presenter with a very differentparadigm...Robert Hall, whom a professor in my department once called the "greatest macroeconomist working today":

Bob Hall argued that fiscal policy was not working, and focused on alleviating the zero lower bound constraint on monetary policy.

This phrasing makes Hall sound like an opponent of fiscal policy. But actually, the exact opposite is true! Hall is one of the most eminent "Keynesians" in the field, a big proponent of government expenditure as a way to get out of recessions. If you don't believe me, read this paper he wrote on fiscal stimulus. In fact, I was pretty surprised to see his name on the Hoover conference list, given this fact.

So why is Hall now saying that "fiscal policy 'was' not working"? Well, what he almost certainly means is that most of Obama's ARRA stimulus came not in the form of government purchases of things like infrastructure, but as tax credits and grants to the states, both of which were promptly saved rather than spent. This is a point that has been made by, among others, Paul Krugman and John Taylor.

So what Hall actually said at the Hoover conference was almost certainly "Congress should borrow money and buy more infrastructure, but since it appears unwilling to do so, the Fed should print money and buy financial assets." In other words, pretty much the standard Keynesian line (Update: via Paul Krugman, I find out that Hall's position is that Obama's stimulus did help make the recession less severe, and that the stimulus should have been larger). As for John Taylor himself, the paper he presented at the Hoover conference was the one I discussed here, which said pretty much the same thing that Hall said - stimulus spending should have been more about spending on infrastructure, and less about handing people blocks of cash that they promptly stuck under their mattresses.

Which is a good point, but not really an argument for austerity.

Finally, there was Lee Ohanian:

Lee Ohanian showed that unemployment remained high in part because of restrictions on foreclosure proceedings which increased search unemployment by allowing people to stay in their homes for longer periods of time.

That's kind of interesting, actually.

Anyway, let's sum up. What we have here appears to be a conference to which the Hoover Institute invited A) prominent conservatives (Greenspan, Prescott, Cochrane, and Ohanian), and B) people who happened to be sitting nextdoor at Stanford (Bloom, Hall, and Taylor), with an eye to reiterating and affirming standard conservative policy prescriptions: austerity, tax cuts for the rich, etc. What they got wasn't quite that, but it was close enough where the dissenting voices could be spun to sound as if they agreed with the party line. Not sure if it was someone at Hoover or just Taylor himself doing the spinning. But either way, the conference shows that even in relatively conservative circles, substantial deviations from the party line can't help but pop up. Put enough smart people in the room, and at least a couple smart things will probably end up getting said.

Update: Paul Krugman thinks John Taylor heavily spun the conference results. Taylor begs to differ. In particular, Taylor says that things were discussed at the conference that were not contained in prior research by the presenters. That is, of course, usually the case at conferences; I am looking forward to seeing the discussion published.

Krugman claims that my summary mischaracterized the presentation of my Stanford colleague Bob Hall...As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.” That is why Bob focused his paper at the conference on monetary policy and the problem of the zero lower bound, and that was what all the discussion of his paper was about, rather than on his earlier work on the multiplier[.]

But in his original summary, Taylor wrote: "Bob Hall argued that fiscal policy was not working." (emphasis mine on both quotes)

"Not working" and "not politically feasible" are two very, very different things.

Update 3: Menzie Chinn elaborates on how Nick Bloom's research supports the hypothesis that it is Republican fiscal brinkmanship, not Obama administration regulatory policy, that is causing uncertainty. Well worth a read.

45 comments:

It's sad to see so many prominent economists so worried about their reputations that when reality diverges from their worldview they double down on crazy. Prescott, Ohanian and Greenspan are disgraceful. Ohanian must not be trying to sound even remotely sane anymore. He's managed to survive having all of his theories completely trashed by data and now must simply realize that he can whore off millionaires' money without being held accountable for his twisted world view.

Noah: "But either way, the conference shows that even in relatively conservative circles, substantial deviations from the party line can't help but pop up. Put enough smart people in the room, and at least a couple smart things will probably end up getting said."

Actually, what you describe is that a bunch of right-wing economists will do their d*mnedest to lie, but not be 100% successful.

This is important - instead of being largely reality-based, with some bias, they are largely lie-based, with some honesty.

Lee Ohanian showed that unemployment remained high in part because of restrictions on foreclosure proceedings which increased search unemployment by allowing people to stay in their homes for longer periods of time.

So if you don't have a job, because there aren't any jobs, losing your home will stimulate you right into getting one of those non-existent jobs. Riiiight. This certainly stimulates me into setting up as an entrepreneur of tar, feathers, rails, tumbrels, and lampposts.

"Noah, I again suggest banning anonymous comments, although it is fun to see Mr. Anonymous talking so much smack."

Well, I still maintain my totally arbitrary comment deletion policy. But I spent enough time as an anonymous internet troll back in my teenage years that I'm not going to stop people from blowing off some steam.

Besides, the poor guy capitalizes "shit." Banning him would be kicking him when he's down. ;)

There's more that I want to say about this tomorrow, when I hopefully sound smarter, but I will say two things now. First, wasn't Hall's wife, Susan Woodward, also a prominent economist, a big proponent of state aid? I seem to remember reading something along those lines. Second, I wonder what these guys really think of Bob Hall, given that he seems to be saying things that aren't all that different than what Krugman has been saying. I ask not as a Krugman fanboy, although I am a fan, but because he seems to retain such an amusing degree of hysterical importance in their minds.

This is a neat and straightforward takedown of supposed "intelligentsia". But of course the media will give Greenspan and Co equal time no matter how many times they've been proven wrong by you and others, in the interest of fairness.

"I am persuaded that GDP rises by roughly the amount of an increase in government purchases. I am aware that neoclassical models have no hope of explaining such a high multiplier, even if extended to include unemployment along the lines discussed in this paper. I am impressed by the success of New Keynesian models in matching the observed multiplier, for the following reason: The models were developed for rather di fferent purposes and estimated using data containing essentially no variation in government purchases.

Notwithstanding this success, I am concerned about the weak factual support for the key mechanism underlying the New Keynesian explanation of the multiplier, the decline in the markup ratio that accompanies an increase in output. The behavior of pro t margins suggests on its face that the markup ratio rises with output. The only plausible way for falling markups to t the data is a lot of wage smoothing. I think there is room for new ideas outside the New Keynesian framework to explain the high value of the multiplier along with other mysteries about aggregate economic behavior."

@Tehanu - my thoughts exactly. I'm certainly no economist, but that seems like crazy talk to me. Not to mention, in addition to what you said, that losing one's house is far from the only motivation for getting a job. And, if foreclosures happen sooner, we'll just have more homeless people. Everyone knows how easy it is for homeless people to get jobs...

"Wow I've never heard such a nothing insult people who are so much better, as people, than him."

I wouldn't be too surprised if that comment was pretty similar to the reaction by the British monarchy towards Thomas Jefferson after reading the Declaration of Independence.

But in all seriousness, have you met Ed Prescott? I don't know that "good person" is quite the right description for that increasingly insane curmudgeon. Go find one of his former students and ask them about whether or not he's a "good person." You'll get some polite platitude about respecting the work he's done, etc. but when it comes to his personality, they shut up with a fearful look that implies some mix of "don't bite the hand that feeds you," and "if you have nothing nice to say, don't say anything at all."

Actually historical evidence shows that Hoover expanded public spending to unprecedented levels, raised import taxes, and thus laid the foundation to turn what was going to be a quick recession into The Great Depression.

If you're interested in historical notes from that era, you might be interested in this:

http://www.youtube.com/watch?v=KSNOCjLFVCM

Unfortunately, in my opinion this article doesn't add anything interesting or new to the debate, that I haven't heard Keynesian and Monetarist clowns and beat to death many times over already over the past decades.

I do understand that someone who's taught this stuff in school from day one on, feels the need to repeat it and tell himself that it makes sense, I've been there.

So long as you keep an open mind for novel ideas, reason from first principle, and make a commitment to pursue the truth no matter what, you'll be fine and future generations will thank you for it.

Nobody cares anymore for the ramblings and edicts of witch doctors, high priests, and racists from the past. Yet, their teachings were once as ubiquitous as water to a fish, or as statist propaganda to a student of economics. ;)

" Actually historical evidence shows that Hoover expanded public spending to unprecedented levels, raised import taxes, and thus laid the foundation to turn what was going to be a quick recession into The Great Depression."

The reason why EconomicsJunkie (and his sources, like Megan Mcardle) are wrong is a basic error in math: they are looking at spending as a percent of GDP, and it did, indeed, grow significantly from 1929-1933. The problem is that the reason it grew that much was that GDP plummeted. Spending stayed at about 2% growth, and, of course, the positive job-generating effects of his public works projects (which were minor anyway with the Federal budget being a small part of the American economy) were undermined by spending cuts elsewhere -- because Hoover insisted on a balanced budget, the last thing a country needs in a severe economic downturn.

I guess the moral of the story is that if you don't agree with what is being said or it's inconvenient, you can always lie about it. Interesting that Greenspan's analysis isn't publicly available for free... it's like he's trying to hide something.

When you reply with the most obvious and primitive of objections and pretend that I'm somehow incapable of grasping that kind of knowledge and prone to "errors in math", then you're unfortunately implying that I'm a complete and total retard.

And you may very well be right on that in which case replying to comments of mine wouldn't make a whole lot of sense. So either way you're not acting with a whole lot of integrity.

It's always the most convenient path to choose to assume that your adversary is mentally challenged and that that's why he's incapable of grasping your brilliant and complex theories.

In fact I would argue that it's downright lazy.

And it's this laziness that really upsets me when talking to people about this beautiful and precious thing called economics.

Anyway, let me give you my 2 cents on your comment:

In my opinion, you actually forgot to point out where exactly in the theory that I proposed the mathematical error lies. 1+1=3 is a mathematical error.

What I said was that under Hoover US government spending rose to unprecedented levels.

Had you actually listened to the link I supplied you would have noticed that I'm well aware of the relative AND absolute level of spending increases.

Total US government spending 1929:$11.84 billion

Total US government spending 1933:13.23 billion

Under president Hoover US government spending rose to before unseen levels (peacetime, granted) both in absolute AND relative terms.

And yes, I know I know, in relative terms the rise was higher than in absolute terms.

And if it was the other way around, then you people would give me the exact opposite argument.

And if it rose strongly either way, then you're going to pull out the magical argument of "Yes, but, you see, the money wasn't spent PROPERLY, it was just spent on speculation, not on public works programs".

And so on and so forth. It's literally like arguing with a religious person about the existence of God!

It seems that the opinions of economists seem to be more and more in direct sync. with the views of their employers, and thus is economics, even as a "dismal" science, getting more and more a bad name.

And when did economics become a faith-based science anyway? Who told these conservative economists that they could replace their Econ 101 textbooks with nonsensical tomes from the atheist, Ayn Rand? And yes, Alan Greenspan was a devoted acolyte of that crazy b*tch! Yeah, the emperor really has no clothes on, does he? Take away the blindfolds of Koch Bros funded think-tanks, and everyone can see that he's stark bollock naked!

It seems like you forgot to point out where the statement I made lacks integrity?

I consider the use or threat of aggression (the initiation of the occupation of one's body or property against his will) a moral evil and a destructive activity, and I have outlined many times over why I believe that that is the case.

When I level a strong accusation against ideas that I find morally disgusting, reprehensible, negligent, and irresponsible because socially destructive, and I go on to outline why that is so, then I have a hard time seeing how I lack integrity, meaning how my actions are not in tune with my beliefs.

That said, I may as always be missing something and I'll gladly receive your well thought out, reasoned, and empirical arguments.

I can excuse and even sympathize with genuine ignorance for myriad reasons, but if someone is presented the knowledge left and right, and deliberately chooses to ignore it and to continue to spout out the same nonsense over and over again, just because it's more convenient to do so, while at the same time keeping silent about this lazy streak of his, then that's something I have a hard time exculpating people for.

OK, seriously, who are you accusing of dishonesty? Me? Noah? Felix Salmon? I'm having a hard time picking this up.

I looked at your post in more depth, and Felix's as well. My conclusion is that in your view the Framers of the US Constitution would easily qualify for grade A scumbag status under your system of morals.

So, did I fail to point to a lack of integrity on your part? No, I did not. Using language like "scumbag" to describe people you don't agree with is gratuitous, mean-spirited and completely without meaningful content. It lacks integrity.

Also too, I chastised you for putting words in peoples mouths. That is seriously lacking in integrity. Show some patience, show some willingness to actually listen to what people say. Don't project your elaborate ideological prejudices upon others.

Noah -- Maybe it is me, but are you making a political commentary with this post or have I simply missed the economics? Since neither you nor I were present at the conference, perhaps it would be better to wait for comment by those who were present to make their points.

I would like to point out though that I did not call anybody a scumbag.

I used the term scumbaggery as a derogatory label for a theory that was put forward, and I pointed out why I thought it was a destructive, reprehensible, and irresponsible theory.

I apologize if my language was offensive.

As far as putting words in someone's mouth: Where did I do that?

As far as the US Constitution goes:

Again, I wouldn't necessarily call its framers scumbags, I actually think one could argue that a lot of their well intentioned ideas came out of the spirit of enlightenment, one of the greatest steps forward in the realm of political thought and action, relatively speaking.

But you're right, in thinking through this I can't come to any other conclusion but that the constitution is an enabler of threats and acts of aggression on a large scale.

And thinking further, one could actually argue that it is far more dangerous than an outright tyranny, as it solidifies the power base of the gang that performs those acts and threats of aggression, namely the abstract consent of the governed who believe that their will is actually represented in any way.

I think 1.4 million dead Iraqis' family members and friends (just to bring up one contemporary example) might agree with me.

And how about 2.4 million US citizens locked up in rape rooms, many of them convicted for non-violent actions?

I think empiricism goes to show us that whatever goals the framers of the constitution had, it seems like they kind of failed.

So to me the most important lesson out of that is: Let's at least not try that again.

Thank you for your good-natured, candid reply. I appreciate it very much.

Re-read your post of 9:30 pm, toward the bottom, is where you are putting hypothetical arguments in the mouths of others.

As to the US Constitution, I must politely and yet strongly disagree. (A flaming liberal defends the USC!)

There are good reasons (very good reasons imo) for the evolution of representative democracy. One of my favorite books of all time is I.F. Stone's 'The Trial of Socrates.' You are an intelligent person with a thirst for knowledge... at least that is my impression. You might really enjoy that book. It puts the flesh on the bones of:

I was referring to urban legend's comment about "the positive job-generating effects of his public works projects".

I may have put literal words in his mouth but I think that their meaning is a reflection and maybe an extension of what he actually meant.

In fact, I have heard this argument so many times from statists that I would bet you dollars for donuts that he would not shy away from deploying it explicitly if needed.

I don't disagree at all that there were good reasons for the emergence of representative democracies. I think I made that pretty clear when I lauded the founder's progressive drive toward a better system, based on enlightenment ideas, rather than ancient power structures, maintained and passed on for generation after generation.

But the whole point of science and progress is to take that which has been created and make something better out of it, to learn from its history and its past mistakes, and to lay the foundation for something even better for future generations.

Thanks much for the book recommendation. I'll read it. I actually read the original trial of socrates in my ancient greek class in high school :)

Money quote: 'So Hoover ran up very little debt — only about 6 percent of 1929 GDP. FDR, on the other hand, ran up a lot of debt, about 47 percent of 1933 GDP. But Hoover presided over a shrinking, deflationary economy, while FDR presided over a rapidly growing (from a low base) economy with rising prices.'

From Brad DeLong (http://delong.typepad.com/sdj/2010/07/cant-anybody-here-play-this-game-fiscal-policy-edition.html): 'Could we please have some acknowledgement of the fact that the reason the debt-to-GDP ratio did not rise across the 1930s was because GDP rose, not because debt didn't rise? Debt more than doubled from $22.5 billion to $49.0 billion between June 30, 1933 and June 30, 1941. But nominal GDP rose from $56 billion in 1933 to $127 billion in 1941.'

How is that supposed to work exactly? Business owners are taxed on their profits, and what maximizes profits when taxed at 20% is exactly the same as what maximizes profits when they are taxed at 60%. So there are no incentive effects at all when it comes to job creation. Or is it that conservatives believe that taxes have primarily income effects on the rich as surely as they believe taxes primarily have incentive effects on the poor?

Seriously, what am I missing? Is there some slightly plausible modestly developed conservative economic theory behind this idea?

"Note: John Taylor fails to mention that, according to Bloom's measurements, the main sources of uncertainty in the current recession have been A) Republican brinksmanship over the debt ceiling, B) Europe, and C) efforts to sue Obama's health care bill out of existence..." [sic]

And here are the actual words of Bloom and his fellow authors in their linked Bloomberg article, delineating the recent causes of policy uncertainty:

"But the persistence of policy uncertainty wasn’t inevitable. Rather, it reflects deliberate policy decisions, harmful rhetorical attacks on business and 'millionaires,' failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship."

I sure hope nobody is relying on Noah for an honest and fair characterization of the works he links to and cites.

Fair enough, but look at the headings of the paragraphs in the Baker/Bloom/Davis article:

1. "Debt Ceiling"

2. "Legal Challenges"

3. "Expiring Tax Cuts"

4. "Debt Crisis"

This list of sources of uncertainty corresponds exactly to what I listed in my blog post. Yes, there is the one line about anti-millionaire rhetoric, but that is never mentioned again in the article, examples are not given, and it is not discussed in the paper on which the article is based.

"[Uncertainty i]ndex values are very high in recent years with clear jumps around the Lehman bankruptcy and TARP legislation, the 2010 midterm elections, the Eurozone crisis and the U.S. debt-ceiling dispute."